A Bumpy Road to a Familiar Low-growth Destination
PGIM Fixed Income explains why it expects to see secular factors overtake cyclical trends as already-building headwinds slow the global economy.
Outlook Improves for Growth Stocks
Jennison Associates explains why growth stocks are likely to regain investor favor and how lower valuations are creating an attractive entry point for long-term investors.
When investors prepare for tightening cycles, they tend to focus on how much interest rates will rise and when, putting pressure on the highest growth and highest-multiple stocks that are not currently profitable but are expected to be in the future. But as investors shift their focus on what higher rates ultimately mean for the economy, growth stocks typically regain investor favor. Growth stocks plunged into bear-market territory in the first half of 2022. While it appears most of the significant damage is done, continued volatility is expected until there is clarity around when and where rates may peak.
Source: Morningstar as of 5/31/2022. Growth represented by Russell 1000 Growth Index and Value represented by Russell 1000 Value Index. Past performance does not guarantee future results
GROWTH STOCKS TO REBOUND AS THE ECONOMY SLOWS
We are likely past peak growth for this cycle as investors grapple with the economy’s ultimate direction—a soft landing, stagflation, or a recession. In any of these scenarios, GDP growth would decline. Subsequently, stocks that can offer durable growth become more attractive and in higher demand. While the timing of when this will happen is still uncertain given some lingering wild cards, conditions should materially improve for growth stocks.
RESET VALUATIONS CREATE AN ATTRACTIVE ENTRY POINT
After the sharp sell-off, price-to-earnings (P/E) multiples for growth stocks have sharply contracted to below long-term averages, both in absolute terms (compared to their own historical performance) and in relative terms (compared to their performance versus value stocks). As valuations have reset, strong secular growth stocks with high consumer demand, pricing power, and robust revenues present an attractive entry point for long-term investors. While these stocks may continue to reprice in the near term based on future rate hike expectations, their ability to consistently deliver durable, profitable growth will make them more valuable to investors as economic growth prospects decline.
Source: FactSet as of 6/15/2022.
QUALITY OF GROWTH MATTERS
Longer term, we see a wide frontier for new market leaders to emerge, in sharp contrast to the broader market and its historically low share of companies posting strong revenue growth. A little more than a decade ago, one out of every two companies in the MSCI ACWI Index was growing sales at 15% or more annually. Today, it’s one in five. Given this dynamic, investors will be willing to pay more for companies with consistently stronger earnings growth because these stocks outperform over time.
Given the rapidly shifting macro backdrop, it's important to find secular growth with grit to better navigate the near-term uncertainty.
GROWTH WITH GRIT: WHERE TO FIND OPPORTUNITIES
In a world of scarcer growth and rising competition, the future belongs to companies that understand the transformative power of technology and successfully integrate it into their core business models. The tech-driven growth cycle is far from over, though it is evolving. Areas such as direct-to-consumer, cloud computing, digital payments, and health care innovation will be big beneficiaries of the digital revolution over the long term.
Given the rapidly shifting macro backdrop, we also think it’s important to find secular growth with grit to better navigate the near-term uncertainty. Some prudent and attractive options to boost durable growth exposure and help withstand the turning tides include:
- Upgrade portfolios with high-quality names with strong durable earnings.
- Reduce interest-rate sensitivity by paring back on high-multiple stocks.
- Play into the business cycle with exposure to medical technology companies that can benefit from procedures that were delayed during the pandemic.
EXPLORE MORE THEMES
Credit Markets Favor Alpha Over Beta
PGIM Fixed Income discusses reasons for its near-term caution but long-term optimism and where to find opportunities for different economic scenarios.
Real Assets Outshine if Inflation Persists
PGIM Quantitative Solutions explains why inflation may linger longer this time and how adding real assets to portfolios can help mitigate inflation risks.
Real Estate Poised to Perform Going Forward
PGIM Real Estate discusses how real estate is well-prepared for what comes next and can help investors mitigate both inflation and interest rate risks.
Inflation and Demand Tailwinds Buoy Midstream Energy
Jennison Associates explains short-and long-term tailwinds that should continue to support the midstream energy sector, such as surging demand for natural gas.
Agile Alternatives Diversify Amid Macro Uncertainty
PGIM Wadhwani explains why portable alpha approaches with low correlations to stocks and bonds are well suited to today’s challenging investment landscape.
Volatility Boosts Tax Loss Harvesting Potential
PGIM Custom Harvest discusses how tax loss harvesting strategies can help investors turn volatility into opportunities to increase after-tax return potential.
The Great Balancing Act
PGIM asset managers assess key trends shaping the investment landscape and where to find opportunities for different economic scenarios.
Risks—Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Fixed income investments are subject to interest rate risk, and their value will decline as interest rates rise. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Investments in growth stocks may be especially volatile. Value investing involves the risk that undervalued securities may not appreciate as anticipated. It may take a substantial period of time to realize a gain on an investment in a small or midsized company, if any gain is realized at all. Real estate investment trusts (REITs) may not be suitable for all investors. There is no guarantee a REIT will pay distributions given the inherent risks associated with the market. A REIT may fail to qualify as a REIT as defined in the Tax Code, which could affect operations and negatively impact the ability to make distributions. There is no guarantee a REIT’s investment objectives will be achieved. Diversification and asset allocation do not guarantee profit or protect against loss. Investments in in Master Limited Partnerships (MLP) and MLP-related investments are subject to complicated and in some cases unsettled accounting, tax, and valuation issues, as well as risks related to limited control and limited rights to vote, potential conflicts of interest, cash flow, dilution, and limited liquidity and risks related to the general partner’s right to force sales at undesirable times or prices. MLPs are also subject to risks relating to their complex tax structure, including losing its tax status as a partnership, resulting in a reduction in the value of the MLP investment. Many MLP investments are in the energy sector and subject to a greater degree to risk of loss as a result of adverse economic, business, regulatory, environmental, or other developments affecting industries within that sector than investments more diversified across different industries. Diversification and asset allocation do not guarantee profit or protect against loss.
The views expressed herein are those of investment professionals at Jennison Associates LLC (“Jennison) at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice. PGIM Investments LLC is a registered investment advisor with the U.S. Securities and Exchange Commission. PGIM Custom Harvest does not provide tax, legal, or accounting advice. This material is for information purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
Prudential Investment Management Services LLC is a Prudential Financial company and FINRA member firm. Jennison Associates, PGIM Custom Harvest, and PGIM, Inc. (PGIM) are registered investment advisors and Prudential Financial companies. PGIM Quantitative Solutions is the primary business name of PGIM Quantitative Solutions LLC, a wholly owned subsidiary of PGIM. PGIM Fixed Income and PGIM Real Estate are units of PGIM. © 2022 Prudential Financial, Inc. and its related entities. Jennison Associates, Jennison, PGIM Real Estate, PGIM, and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
1060882-00001-00